Financing Efficiency in the Delivery of Social Services

Traditional approaches reward activities, not results. Some innovative new approaches aim to turn that around through creative financing.

Public officials can produce better and cheaper results when they buy smarter, and few areas are more ripe for change or so fraught with problems as when government procures social services.

As a rule, government purchases activities--such as drug and mental-health counseling, job training or homeless-shelter beds--rather than the outcomes these activities are intended to bring about. As Gigi Georges, Tim Glynn Burke and I discussed in our recent book, "The Power of Social Innovation," we need newer, more disruptive ways to shake up what is often an iron triangle of social-services funding that protects the status quo at the expense of those who need help. Two recent initiatives hold the promise of better results.

"Social impact bonds" (SIBs), also known as "pay-for-success" contracts, allow governments to avoid the upfront costs and risks of initiating new social programs. Nonprofits and investors bid to run programs and achieve certain parameters. Contractors' program costs are refunded if the metrics are met, and they receive bonuses for each additional surpassed target, making the bonds an attractive investment opportunity incentivized toward exemplary program implementation. Meanwhile, investors can contribute to their communities while potentially earning a reasonable rate of return.

The city and Goldman Sachs will depend on the respected social-policy research organization MDRC to implement the program, and MDRC will contract with two community nonprofit organizations, the Osborne Association and the Friends of Island Academy. The Vera Institute of Justice will provide impartial, third-party evaluation. The city's corrections department will pay MDRC if the objectives are met, allowing MDRC to pay back Goldman Sachs, which stands to profit on its investment should the program exceed baseline goals.

Bloomberg Philanthropies is providing a $7.2 million loan guarantee to help underwrite the risk to MDRC and in turn make the Goldman Sachs investment more feasible. This risk-sharing aspect stands as the foundation for this breakthrough approach, hopefully serving as a model for other governments, their nonprofits and their foundations.

This social impact bond (a misnomer since it is not really a bond in the conventional sense) bears a lot of resemblance to the "social innovation fund" (SIF) efforts undertaken by the White House. Administered under the Corporation for National and Community Service, the SIF program provides funding to experienced grant-making intermediaries that match federal funds dollar-for-dollar and then select local nonprofits through a competitive process. As with SIBs, the goal of the SIF approach is to change the normal course of government contracting, in which sought-after results are tightly prescribed and then put out for bids. This traditional approach suffocates innovation, often reducing the RFP process to a pricing competition. SIFs instead employ a venture-fund model, seeking proposals for ways to solve an important social problem with a set of performance deliverables for which the contractor will be responsible.

These efforts will produce successes and failures. What they will not produce is the continuation of a mediocre status-quo approach to social services that substitutes activities for results. With the economy continuing to pressure government to be more fiscally responsible, we need more than ever to maximize progress with every single dollar government spends to deliver vital services.